Facebook to supercharge revenues by scrapping free ads

Madeleine Heffernan

Facebook has quietly informed local advertisers that it intends to scrap free advertising for companies, in a move that will supercharge its revenues and force brands to rethink their strategies for the social media company.

Facebook is among Australia’s top 10 digital advertising platforms and has 12 million local users. Companies have long seen getting people to ‘‘like’’ their Facebook page and posting content to it as a relatively cheap way to reach a large and highly targeted audience.

But changes to Facebook’s algorithm means companies’ content is much less likely to appear in the news feeds of people who have ‘‘liked’’ them, from 12 per cent in October last year to about 6 per cent earlier this year.

The end of ‘‘organic reach’’ – the reach that a post gets from a brand without having to spend money on it – over the next year or two will mean brands will have to pay to get their content into newsfeeds or tailor their posts to the Facebook algorithm.

That algorithm puts new content, videos and photos, and content by people you interact with, at the top of users’ news feeds.

Facebook said the decline in organic reach is due to a surge in content and is designed to promote relevant content, rather than push companies into paid advertisements.

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Questioned whether Facebook intended to drop organic reach to zero, a spokeswoman said: ‘‘Facebook is not reducing this. It’s a natural evolution of the platform, one that all other platforms have and are experiencing.’’

Foad Fadaghi, managing director at analyst firm Telsyte, said the shift was likely to increase revenue and to ensure content is relevant for users. He said Facebook, like the rest of the digital world, would become ‘‘more expensive [for companies] to reach the people you want to reach’’.

Laurel Collins, digital strategist and acting head of digital at media agency Mitchell & Partners, said Facebook prices had risen over the past couple of years due to increased demand. ''Gone are the days when digital is a cheap channel,'' she said.

Richard Taylor, digital strategist at Melbourne’s Spinach Advertising, said companies can prepare for the demise of organic reach by generating content that is shared and generates comments, such as promotions and photo contests, and posting at peak times.

Fairfax Media recently revealed that Facebook had sought immunity from corporate rules in Australia requiring companies to disclose their earnings, and was understood to be booking its local revenue in Ireland.

Facebook has never disclosed its Australian earnings, having applied for an exemption from parts of the Corporations Act in 2009. But latest figures from SMI show media buyers had spent $18.4 million in the five months to May, up 50 per cent year on year. Facebook's local revenue has been estimated to be as high as $200 million a year.

Facebook had $US7 billion in advertising revenues last year. Analysts expects this to rise to $US15.6 billion by next year.